How Does the Constant Product Formula Work in a Basic AMM?
The constant product formula, x y = k, ensures that the product of the quantities of the two tokens in the pool (x and y) always remains equal to a constant (k). When a token is bought, its quantity decreases, and the other's increases, automatically adjusting the price to maintain the constant k.
Glossar
Constant Product Formula
Formula ⎊ The Constant Product Formula, a cornerstone of Automated Market Makers (AMMs) prevalent in decentralized finance (DeFi), establishes a mathematical relationship ensuring liquidity pool balance.
Constant Product
Invariant ⎊ The core principle dictates that the product of the quantities of the two assets in a liquidity pool remains constant, represented mathematically as $x cdot y = k$, where $x$ and $y$ are the reserves of the two tokens.
Constant Sum Formula
Formula ⎊ The Constant Sum Formula, within the context of cryptocurrency derivatives and financial engineering, represents a fundamental constraint inherent in certain pricing models and hedging strategies.